A Real McCoy?

By

Jacqueline Doherty

Updated March 15, 1999 12:01 a.m. ET

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O ver the past year or two, John McCoy has been bashed by investors. Once the golden boy of the banking industry,
Bank One
's CEO has come under heavy fire for failing to integrate its acquisitions quickly enough, for not cutting costs deeply enough and, most of all, for not delivering on earnings. The barbs have gotten sharper as McCoy has used company stock to finance his buying spree. He snapped up First USA for $7.9 billion in 1997, First Commerce for $3.5 billion last June and, in his most recent and largest deal, merged First Chicago NBD into Bank One for $21.1 billion in October.

These maneuvers, accompanied by a name change from Banc One to Bank One and a shift in the company's headquarters from Columbus, Ohio, to Chicago, created a Midwestern powerhouse, boasting the nation's fourth-largest bank (based on assets) and biggest credit-card company (measured by outstanding receivables). But they also have weighed on Bank One's stock.

At their recent price of $55, the shares were trading at only 14 times the $3.95 the company is expected to earn this year and just 12 times the $4.56 foreseen for 2000. Those multiples are way below the S&P 500's price-earnings ratio of 25 on projected '99 results and even the 17 multiple of the Dow Jones Regional Bank Stock Index.

Certainly, there are lots of doubters about Bank One's prospects. But events that will unfold soon could boost the stock, which yields a relatively hefty 3%.

At the end of this month, Bank One will submit its 1998 financial results to the SEC. It will break out the performance of each of its units, providing a much clearer picture of the merged operation. This will address Wall Street's gripe that financial results have been murky, owing to writeoffs and special charges, often related to acquisitions.

Breaking out results also may make it more obvious that the investment-management and credit-card divisions are undervalued, says Henry Dickson, an analyst at Salomon Smith Barney.

Bank One's credit-card operations, under First USA, contribute 31% of the company's earnings and the investment-management biz adds 7%. Most credit-card and investment-management outfits sport P/Es in the low 20s. When Dickson, who rates Bank One a "buy," adds up all the pieces, he arrives at a stock price of $62.16-$75.24.

Some analysts also expect a sizable stock buyback, although Bank One is mum on this. Companies usually are allowed to start a buyback about six months after the close of a pooling-of-interests acquisition, like the First Chicago deal. The merger will be six months old in April.

Bank One's online presence also may become larger. The company has marketing agreements with some of the largest Internet players, including America Online and Excite. But the next steps, expected to be disclosed in a few months, could include online banking outside the company's current Midwestern marketing area, and an entity to sell mutual funds and other investments in cyberspace.

Although the company has declined to comment on speculation that it might like to buy St. Louis-based
Mercantile Bancorp
, McCoy says, "I'm not sure we'll ever buy another bank." The CEO, who has purchased about 134 banks since 1983, adds that "the reason you buy another bank is to get access to customers. And historically, to get retail customers you had to have branches." And he continues: "I believe the Internet can be the replacement for the branch network, and I think it's going to happen much faster than most people expect."

Right now, Bank One has retail banking operations in 14 states, mainly in the Midwest, but also in the Southwest, Louisiana and Florida. The 'Net could turn it into a nationwide force. That would fit in nicely with the ambitions of McCoy, who hasn't ruled out further acquisitions in nonbanking areas and who asserts that "we'll be the leading financial-service company in this country" in five years.

He wants Bank One to be first, second or third in all its businesses, including home-equity loans, in which it's No. 5, and mutual funds, in which it ranks a lowly 22nd. "I'm not worried about bad loans," he contends. "I worry that some one is going to take my business away from me, and I'm not going to know it happened until it has gone away."

That's what occurred in the credit-card business. In 1988, the 10 largest issuers were banks; by 1998, four of them weren't. Finance companies had jumped in, changed the rules and learned how to prosper with such low margins that they drove away many banks. Bank One's response: Buy First USA, one of the hungry newcomers. And the deal may help in other areas, too.

Bank One is shifting its direct-to-consumer lending business -- including $30 billion in home-equity and student loans -- from its Finance One unit to the First USA group. Finance One, which has been accounting for 8% of Bank One's earnings, retains the auto-leasing and auto-loan operations (for financing through dealers).

First USA also has a large role in crafting an Internet strategy for its parent. Dick Vague, First USA's chairman, says that its direct-marketing group has used the Internet since 1995. "We looked at [the Internet] not as a way to serve existing customers, but instead as a way to book new business," he observes. Last year the group signed up at least 300,000 credit-card accounts online.

Of course, investors won't care much about Bank One's Internet plans if it flubs its costly marriage with First Chicago.

Success there certainly would please Wall Street. "We're just looking for a little more evidence that the merger is being implemented as planned," says Michael Mayo, a Credit Suisse First Boston bank analyst, who rates the stock a "hold."

McCoy has promised to squeeze $930 million of savings out of the combined giant and to find $270 million in new revenue, for synergies of $1.2 billion over three years. Half of it will be realized this year, he maintains, 40% next year and 10% in 2001. McCoy also expresses confidence that earnings can rise by 15% annually for at least two years.

Meeting these lofty goals will be tough, especially in light of the new company's size. The combined operation has $280 billion in assets, more than 2,000 offices and even different computer systems.

The combined operation's top brass comes from both the old Banc One and First Chicago. Verne Istock, the CEO of First Chicago, is now chairman of Bank One. McCoy is the CEO. Ranking just below them are two vice chairmen: Richard Lehmann, who was president of Banc One, and David Vitale, who was a vice chairman at First Chicago.

One of management's priorities is to efficiently blend Banc One's and First Chicago's overlapping businesses.

Their credit-card operations, which are being linked under First USA, are being quarterbacked by Dick Vague. The units already have started a joint marketing effort. By the year's end, they will share the same computer system.

Together, First Chicago and Banc One have investment and mutual-fund operations that manage $125 billion in assets. By April 1, the funds run by Banc One under the One Group name and those managed by First Chicago under the Pegasus label will be merged, with the One Group moniker surviving. The unit also offers insurance and trust services.

Commercial banking should contribute about 38% of Bank One's earnings. First Chicago had a much stronger capital-market and commercial-banking operation, but the old Banc One had broader distribution. So two former First Chicago pros, Jerry Jurgensen and Susan Moody, will head the commercial-banking segments. And Ron Steinhart, formerly of Banc One, will lead the commercial-real-estate and private-banking units.

The retail-banking operations will be tougher to blend. Headed by Ken Stevens, formerly of Banc One, they account for about 16% of Bank One's earnings. Banc One and First Chicago overlap in Illinois and Indiana and had to sell 51 branches in the Hoosier State to satisfy antitrust regulations.

Obviously, an immense amount of work remains to be done. But if McCoy's vision is fulfilled, shareholders should be amply rewarded. And if it doesn't, well, a number of large banks with little presence in the Midwest -- Nationsbank, Wells Fargo, Fleet come to mind -- would surely be interested in making an acquisition. So investors might do well to bank on Bank One, regardless of what its future holds.

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